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Can the Netherlands Keep Its Triple-A Rating?

Liza Jansen, special for CNBC.com
Tuesday, 21 Aug 2012 | 3:47 AM ET

Moody’s is threatening to push the Netherlands out of Europe’s coveted triple-A club, and not without reason.

Amsterdam, the Netherlands
Dennis Flaherty
Amsterdam, the Netherlands

The euro zone’s debt woeshave paved their way deeper into northern Europe, and as a decisive solution to the crisis remains out of sight, more signs are emerging that the Netherlands can no longer uphold its status as being one of the region’s safest havens.

Its economy is on the brink of another recession, according to Rabobank, which forecasts that GDP is likely to contract again in the third quarter following to slowing foreign trade and sluggish domestic consumption. Official data showed on Monday that consumer confidence is at a low ebb, and a property crisis is looming as the debt on one in four mortgaged homes is expected to exceed their value, according to Dutch bank ING.

At the same time as the economic landscape is worsening, the political campaign season is in full swingas the country heads for an election on September 12, splitting Dutch voters on whether the government should stick to its EU budget target, and stirring resentment over what is widely seen as German-imposed domestic deficit reduction targets.

Netherlands Still a European Success Story
Julian Callow, chief European economist at Barclays, told CNBC the Netherlands is performing very well by European standards, this has been on the back of a very good trade performance.

But Hans Stegenman, analyst at Rabobank, doesn’t think the Dutch elections will further endanger the countries’ triple-A status. “I don’t foresee any coalition government that would not be able to live up to European criteria,” he told CNBC.

What could possibly threaten the country's rating however would be the length of the formation of the coalition government after the elections. “If financial markets think a government formation will take too long, this could be potentially risky. And if the Socialists win the elections, the formation will take months,” Stegenman said.

Stegenman thinks the Netherlands would only be in danger of losing its triple-A rating if the euro zone crisis continues to worsen and other current triple-A rated countries - Germany, Finland, France, Austria – are downgraded.

Although Moody’s economic outlook is rather gloomy, and challenging economic conditions lie ahead, U.S. ratings agency Fitch remains confident on the Dutch economy and said in June that it would maintain the Netherlands' triple A rating.

Nomura has warned that the Dutch elections will have an inconclusive outcome which could be followed by weeks, if not months, of coalition negotiations before an unstable and possibly more eurosceptic new government emerges. The formation of the previous cabinet took 125 days.

Nomura also doubted either a Socialist or a VVD (Liberal) led coalition would assure governmental stability, but argued that the latter would be the better outcome from the perspective of euro zone cohesion.

At the moment Prime Minister Mark Rutte's pro-euro right-wing Liberal Party (VVD) and the far-left Socialist Party (SP) are vying for lead position to form a coalition government, with the SP currently leading the pack with 36 seats, against the VVD’s 32 seats, according to Maurice de Hond, a leading Dutch opinion poll.

The Dutch cabinet collapsedin April when the goverment failed to agree over budget cuts to meet EU targets. Days after the collapse, Rutte’s care-taker government managed to win support from the three opposition parties for the budget measures.

Leader of the Socialist Party Emile Roemer stirred Dutch media last week when stating that his party would not pay a potential fine if the Netherlands failed to meet Brussels' financial targets. “Over my dead body,” he said.

Austerity Is Not the Answer: Dutch Socialist Party
Emile Roemer, leader of the Dutch Socialist Party, told CNBC, the Socialist party is taking a different track, the most important part of our election program is the pace of austerity measures, we think quality of society should be a priority.

But Stegenman doesn’t think Roemer would stick to these promises when he would get elected because the party would have to deal with a coalition government which has to live up to Europe’s criteria.

Malfunctioning Euro Zone

In an interview with CNBC, Roemer expressed discontentment over the euro zone’s current workings.

“Instead of moving forward, Europe has been moving backward since the beginning of the financial crisis. Control of certain countries has been given to a technocratic institution, or an undemocratic institution, (…) which has created a gap amongst Europe’s population and has pushed collaboration further away,” Roemer said.

Roemer however does not advocate a break-up of the euro. His perspective on how the euro zone can leave the crisis behind is if southern European countries would clean up their mess, battle corruption, and would start to become competitive again, he said.

Roemer called on northern European countries to not just cut costs, but to also start investing in their economies again, which would bring back economic growth and would than allow southern European countries to hop on northern Europe’s bandwagon of economic growth.

“The current economic situation in the euro zone calls for investments, rather than a set of rules that need to be lived up to. We’re currently on the wrong track by prioritizing rules over circumstances,” Roemer said.

By Liza Jansen, special for CNBC.com. Twitter: @lizajansen

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